Office of Management and Budget Director David A. Stockman yesterday broke with some administration officials and warned Wall Street that the federal budget deficit will grow by as much as $70 billion in 1988 if the economy continues its sluggish pace.
Stockman also suggested that economic growth in the second quarter will be about 2 percent, a pace that will ensure that the administration will not meet its forecast of 3.9 percent real growth this year without an extraordinary surge in the second half of the year.
In an effort to drum up serious deficit-reduction action by Congress this week, Stockman presented a dour picture of the economy which contrasted sharply with remarks by Treasury Secretary James A. Baker III that the economy will rebound strongly in the third and fourth quarters. Both administration officials spoke at a conference sponsored by the American Stock Exchange.
Commerce Secretary Malcolm Baldrige said several weeks ago that economic growth could be as low as 3.5 percent this year. When questioned after his talk before the business people yesterday, Baker said that the administration has not yet changed its growth forecasts.
Stockman said that the House and Senate budget conference committee is using economic assumptions of a 4 percent growth rate, stable inflation and falling interest rates to make its deficit projections.
But Stockman cited the May consensus forecast by Blue Chip Economic Indicators of a 3.2 percent growth rate for 1985, slightly higher inflation and stable interest rates compared with the administration's prediction of 3.9 percent growth, lower inflation and declining interest rates. "If you went with that more pessimistic view of the economy over the next two or three years, the starting deficits would be something like $20 billion higher next year and $50 billion to $70 billion higher by 1988," Stockman said.
That would make the deficit in 1988 about $170 billion under the Senate plan, compared with the administration's hope for $100 billion by that time.
Stockman said that he believes "we can do better than the Blue Chip forecast is indicating." But he also said "it is fairly clear that the economic warning signs are abundant and all around us that drastic and decisive action must be taken" to reduce the deficit.
Stockman noted that the economy expanded at a 7 percent rate during the first six quarters of the current recovery. However, "For the last four quarters, and including this one just about ended, the rate will probably be in the range of 2 percent, not 7 percent, a rather dramatic deterioration in the expansion rate and one that doesn't even meet the 3 to 4 percent requirement necessary to keep jobs expanding and this economy growing properly," Stockman said.
The rate of expansion of the last three quarters averaged 2.1 percent. If the current quarter is included, as Stockman suggested, its rate would have to be 2 percent to bring the average to about 2 percent growth for the four quarters. The Commerce Department will report the latest quarter's rate next week.
For the administration's forecast of 3.9 percent economic growth for this year to be accurate, the economy would have to expand at a rate close to 6.5 percent in each of the last two quarters of this year, administration economists said yesterday. Few if any private forecasters are predicting such a rebound.
The administration updates its economic forecast for each year in the summer, and government economists said an estimate of about 3.5 percent growth is not unlikely. Inflation predictions in the update probably will be better than original estimates because of the slowdown in economic growth and continued strength of the dollar, economists said.
Private economists have been making monthly reductions in their forecasts for growth this year. Many now are predicting growth of 3 percent or less for 1985 and similar or lower estimates for next year.
Baker said he is optimistic about higher growth because the Federal Reserve began to accelerate money supply growth a few months ago and various interest rates have fallen since March. percent or less for 1985 and similar or lower estimates for next year.
Baker said he is optimistic about higher growth because the Federal Reserve began to accelerate money supply growth a few months ago and various interest rates have fallen since March.